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Investments in Indian renewable energy sector declining

A recent petition filed by Gujarat Urja Vikas Nigam Limited (GUVNL), the off-taker of power in the state, seeking to reduce feed-in-tariff for the already installed solar power projects has created quite a stir in the renewable energy community in India. It is attracting sharp reactions from investors from both within and outside India. The petition has come at a time when a slew of recently released reports indicate that investments in renewable energy sector in India are declining. The reasons include policy instability, high project finance cost, poor balance sheets of power distribution companies and lack of power evacuation infrastructure. However, the government and some renewable energy policy analysts believe that it is just a phase and the investments will only increase in the coming years.

According to a report, Global Trends in Renewable Energy Investment 2013, jointly prepared by Frankfurt School and Bloomberg New Energy Finance (BNEF), new investment of $6.85 billion in India in 2012 was 45 per cent less in comparison to the previous year (see graph). Globally, too, 2012 was a bad year for renewable energy as the total investment of $244 billion was 12 per cent lower than the record figure of $279 billion in 2011 (See box). Frankfurt School is United Nations Environment Programme (UNEP)’s collaborating centre for climate and sustainable energy finance. BNEF is a London-based private firm which provides information on renewable energy markets. The report was released in June 2013. The report pitched India close to Italy and Spain which have seen the sharpest fall of 51 per cent and 68 per cent respectively in renewable energy investment. According to recent figures released by BNEF, the decline continues. The investments in India in the first quarter of 2013 were around $1,407 million and in the second quarter $1,375 million. It is lower by 29 per cent and 27 per cent from the first and second quarter of 2012.

Another report in May this year, prepared by Ernst and Young, a global consultancy firm that releases an annual “Renewable Energy Country Attractiveness Index or RECAI”, says that India has fallen to eighth place from its second place in the previous year’s index. Ernst and Young rates countries based on the ease of doing business in renewable energy sector. There are other reports also that suggest similar decline.

Investment barriers

All the reports cite one common reason for the decline in investments—policy instability. “The Indian renewable energy market which has a huge potential is currently full of uncertainties,” said Shantanu Jaiswal, associate at BNEF’s New Delhi office. For example, despite mentioning introduction of Generation Based Incentive (GBI) for wind power in this year’s Union budget, it has still not been started, added Jaiswal. GBI is an incentive given for every unit of energy generated. In case of wind energy, the government used to give 50 paisa extra for every unit of energy generated. Similarly, the benefit of Accelerated Depreciation (AD) which, along with GBI, was stopped in March 2012 has not been revived.

He lists more reasons, there is still no penalty on not meeting renewable purchase obligations (RPOs) by state governments. Poor balance sheets of power distribution companies which causes delay in payment to the project developers is also seen as an investment barrier.

All these uncertainties are making project developers, investors and funders apprehensive about investing in India, said Jaiswal.

Sanjay Chakrabarti, national head with Ernst and Young, lists more reasons. “Lack of proper power evacuation infrastructure, especially for wind power in Tamil Nadu, has been a major barrier for investing in one of the most wind-favoured states in India,” said Chakrabarti. Also, high project finance cost in India—at 13 per cent interest rate—is one of the highest in the world, he added. Chakrabarti says the reluctance of banks to finance projects in non-recourse basis is another hurdle. In non-recourse financing, the lender is entitled to repayment only from the profits of the financed project and not from other assets of the company. Most banks in India are more comfortable with balance sheet financing, in which if anything goes wrong the banks can cash in on the company’s other assets. “Balance sheet financing curtails the ability of investors to invest in more projects,” said Chakrabarti.

Reports mention more investment barriers. Protectionism measures like ensuring the use of the equipments manufactured by domestic industry in the renewable energy projects in a country also find their mention as one of the investment barriers. As a result, uncertainty over the requirement of domestic content in the second phase of Jawaharlal Nehru National Solar Mission (JNNSM) is being watched closely. According to industry sources, non enforcement of penalty for not meeting renewable purchase obligations (RPOs) by state governments is another hurdle (the obligation makes it necessary for industrial units to meet part of their power needs from renewable sources only). Then, some state power distribution companies are unable to make timely payment for the purchased renewable power because of poor balance sheets. Tamil Nadu, especially, has still not cleared all the pending payments to the wind power developers in the state.

All these uncertainties are making project developers, investors and funders apprehensive about investing in India, said Jaiswal. Industry bodies say that the recent policy changes by some state governments have only increased the apprehensions. For example, Andhra Pradesh, which carried out bidding for an allocation of 1,000 MW earlier this year, has not got many takers. The developers were required to meet the lowest tariff being offered by any other developer for a given sub-station in the state. In a sudden change of process, after the bidding process was complete, the state announced that it could only offer a tariff of Rs 6.49 per unit while the average bid was for around Rs 8.7 per unit. As a result, it could only commission projects for around 400 MW so far.

The recent petition by GUVNL to the Gujarat Electricity Regulatory Commission, seeking to reduce the tariff from the average tariff of Rs 12.54 per unit for 25 years to Rs 9 per unit, proved to be the last straw, said Gaurav Sood, managing director, Solairedirect, a Pune-based project developer who has put in the lowest tariff bid so far of Rs 7.49 per unit in the second batch of JNNSM. GUVNL claims that the developers have made windfall gains and mislead the government.

Bright future

While some of the reasons pointed out in the reports are genuine, the situation is not as bleak as presented, says the government and some renewable energy policy analysts. Tarun Kapoor, joint secretary with the Ministry of New and Renewable Energy (MNRE), justified the decline. A slight dip in solar energy installation in 2012 was because most projects under JNNSM got completed between the financial year 2011 and 2012. In the second half of 2012, the slowdown was because the states were releasing tenders for capacity installation. Andhra Pradesh and Tamil Nadu invited bids for 1,000 MW each around November last year. Now as the developers are in the process of putting up these capacities the installations will go up in 2013. “The decline could be more because of some issues in wind energy sector. But solar energy installation has been doing good,” added Kapoor. The wind energy capacity installation in 2012-2013 in India was just 1,700 MW. It was lower by almost 50 per cent compared to the capacity installed in 2012-2012. “GBI is expected to be introduced very soon,” say Dilip Nigam, director for wind energy with MNRE. In solar energy, the capacity installation was around 780 MW in 2012-2013, which was slightly lower than the capacity installation of around 900 MW in the previous year.

Jasmeet Khurana, head of market intelligence with Bridge To India, gave a clearer picture. “We should not ignore the fact that the price of renewable energy technology worldwide is reducing every year. As a result, even a slight reduction in capacity addition could reflect majorly in terms of value. Some reasons mentioned in the reports could be genuine but many of them were always there. It’s not that situation completely changed last year,” he said. Bridge To India is a New Delhi-based consultancy on solar power. Things are looking up, says Khurana, adding, in solar energy alone Power Purchase Agreements have been signed for around 1,600 MW in states such as Andhra Pradesh, Tamil Nadu, Punjab, Rajasthan, Uttar Pradesh and Karnataka. Apart from this, an allocation of 750 MW is expected under the JNNSM soon. This means that a large quantum of new investments will begin to come in as all these projects begin procurement and construction.

Sood says banks are not getting more comfortable with financing the renewable energy projects because of experience gained.

Amidst this, non-profits like Centre for Science and Environment (CSE) caution that while capacity addition is required in renewable energy, the government should first focus on laying down the clear environmental policy norms for green power in the country. So that it is built in a sustainable manner. CSE recently released a report on green norms for clean energy.

Investment has declined globally

Like India, many other countries, including Germany, Italy, Spain, the US and the UK registered a decline in renewable energy investments. The total investment of $244 billion globally in 2012 was 12 per cent lower than the record figure of $279 billion in 2011. Even the recent figure for the second quarter (April to June) of 2013 was 16 per cent below the second quarter of last year.

In Germany, the investment slipped by 35 per cent to $20 billion in 2012 because of the cut in feed-in-tariff. Investments fell in Spain because it has imposed moratorium over feed-in-tariff for all new renewable projects and a tax on the revenues of clean power generators. In Italy, a cap has been introduced on capacities eligible for feed-in-tariff.

Cheap shale gas and uncertainty over the extension of the production tax credit benefit which provides a 2.2-cent per kilowatt-hour incentive for the first ten years of a renewable energy facility's operation caused decline in investment in the US in 2012. The tax credit which expired in December 2012, has been extended for a year.

Around 6.5 per cent of global electricity was produced using wind, solar, biomass and water-to-energy projects globally in 2012. It was up from 5.7 per cent from previous year. A further shift in activity from developed to developing economies was noticed in 2012. The total investment is developed economies in 2012 was down by 29 per cent at $132billion while that in developing economies was up by 19 per cent at $112 billion, the highest ever.

Among developing countries, China dominated the world in renewable energy investments in 2012 at $67 billion which was 22 per cent more than the previous year. It made China, the world’s biggest destination for renewable energy outlays, at 27 per cent of the global total. It is because of the cheap lending by government-backed banks and policy for promotion of renewable energy.

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Excellent article.
According

Excellent article.
According to the a report published by leading consultancy firm Deloitte on Renewable Energy, the global investments in Renewable Energy Sector will be facing a short term sluggishness.

Under the said report titled as "Alternative Thinking 2013 Renewable Energy under the Microscope" Deloitte has done a through analysis of various countries and according to the same, the global trend in the investments in Renewable Energy sector is showing sign of decline owing to the global economic slowdown.

As per the Report, the causes of this slowdown in India are:

Lack of implementation of Renewable Purchase Obligation (RPO) by the distribution utilities and other Obligated Entities.
Removal of Accelerated Depreciation and lack of clarity regarding generation based incentive.

To make investments in Renewable Energy more attractive there are two ways:

1. To increase mass production with quality so that cost of Renewable Equipment comes down and
2. To increase the efficiency.